Tax Tips
AMT, the Tax We Love to Hate
Millions of taxpayers will be snared by the alternative minimum tax in 2011. Find out if you’re one of them -- and what to do about it.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
November 9, 2011
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About four million unlucky taxpayers will discover that they must pay the alternative minimum tax when they file their 2011 tax returns next year. For most, it can be a nasty surprise, wiping out crucial deductions and exemptions they normally claim, resulting in a bigger tax bill.
SEE ALSO: Brace Yourself for Tax Changes in 2012
But if you knew in advance that you might be subject to the AMT, you could make some smart year-end tax-planning decisions to mitigate the damage. We’ve created a simple calculator to help you figure out if you might be an AMT victim.
The AMT is a parallel tax system created more than 40 years ago to prevent excessive use of tax breaks by the very wealthy, ensuring they paid at least some tax. But because it was never indexed for inflation, the AMT has morphed from a “class tax” into a “mass tax”, affecting millions of middle-class Americans each year. The number of taxpayers owing the AMT grew from about 20,000 in 1970 to about four million in 2011, according to the nonpartisan Tax Policy Center.
The AMT does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or tax and investment expenses -- write-offs that save money in the regular tax world. Nor does it allow personal exemptions -- worth $3,700 this year -- for yourself, your spouse and each of your dependent children. Consequently, taxpayers with large families or those who live in high-tax states, such as California and New York, are more likely to find themselves subject to the stealth tax.
Normally, if you pay quarterly estimated state income taxes or have a real estate tax bill due in January, you can prepay it in December and boost your deductions on your 2011 federal tax return due next spring. But if you're subject to the AMT, this sooner-rather-than-later strategy won't work for you.
Beyond denying such write-offs for taxes, the AMT also puts the squeeze on deductions for medical expenses. In the regular tax world, medical costs in excess of 7.5% of adjusted gross income can be deducted. In AMT-land, the threshold is 10% of AGI. (The AMT does, however, permit tax deductions for charitable contributions, so you can go ahead and make your usual year-end donations.)
The top AMT rate is 28%, well below the 35% at which the regular tax maxes out. But because more income can be taxed by the AMT, you could wind up with a bigger tax bill. In fact, you only owe the AMT when it costs you more than the regular tax.
Although the AMT exemption is not indexed for inflation, in recent years Congress has protected millions of taxpayers by passing temporary patches to raise the level, usually one year at a time. Taxpayers whose income exceeds the AMT exemption must calculate both regular tax and AMT liability and pay the larger amount. For 2011, the AMT exemption is $48,450 for individuals and $74,450 for married couples filing jointly.
But unless Congress acts, exemption levels will drop to $22,500 for individuals and $45,000 for married couples filing jointly in 2012, exposing 31 million taxpayers to the AMT next year, according to Tax Policy Center estimates.
That means virtually 100% of married couples with incomes between $50,000 and $475,000 -- even those who claim the standard deduction -- would be subject to the AMT next year unless exemption levels are raised, says Michael Kitces. Kitces is the director of research for the Pinnacle Advisory Group, in Columbia, Md., and developed the data that serves as the basis of our AMT calculator. Single taxpayers are threatened, too. Without another patch, almost all single taxpayers with income between $150,000 to $300,000 will be subject to the AMT in 2012.
So check out our calculator before you decide to pay state income or real estate taxes in December that you could put off until January. If it looks like you’ll be an AMT victim, don’t bother.
Sneak preview: new tax benefits -- as well as burdens -- for 2012
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Reader Comments (11)
Posted by: JD at 03/12/2010 05:36:25 PM
$22 billion from four million taxpayers for 2008 alone, huh? That's $5,500 per person. That's not very much for "rich people". Know why? Because over the years, changes in the tax code (starting with Reagan in 1986) have minimized the difference between the AMT number and the "regular" number by removing loopholes in the regular tax code. Of course, social engineers keep adding new loopholes and complexity to the code, but now they've learned the art of the "income cap" to prevent the rich from cashing in. End result? A bunch of knuckle-dragging idiots who look only at the tax brackets and insist that the rich are underpaying, when in fact the AMT (which we all know has never changed, unfortunately) proves that they are paying more under non-AMT rules than they have since the AMT was created 41 years ago.
Posted by: Nick at 03/13/2010 10:05:29 AM
Nice article. I have a question about the exemption amount of $46,700 for singles. Does this mean if my AGI is $46,700 or below then I do not have to pay the AMT or is it the amount of my income that is excluded from AMT if I am subject to the AMT? It seems to be the latter, but please confirm or clarify. Thanks!
Posted by: libertarianman at 03/13/2010 06:38:06 PM
The one thing you never read about in AMT articles is that AMT seems to only really apply to the middle to upper middle class. It was a tax to prevent the rich from escaping paying their "fair share". What they don't tell you is that many executive compensation packages are designed to be very tax efficient. That's one reason why you see so many executives getting compensated with stock. You can even escape AMT with the ISO the author mentions, if you structure the package correctly. That leaves much of the compensation at the 15% capital gains level, not the higher 26/28 percent AMT or higher 39.5 percent income tax. All those executives who work for $1/year? I think not. I just don't know why these authors never talk about the real effect of AMT. It might raise a lot of tax dollars, but it's off of the middle class backs, not the rich. Wasn't that the intent of the AMT? What I'd like to see is an analysis showing who really pays AMT and who doesn't.
Posted by: ECB at 03/15/2010 04:45:08 PM
The column on the AMT was very informative. Perhaps you could write another one on whether the deduction for charitable contributions is affected by the AMT, as your column did not address that.
Posted by: JA at 03/15/2010 04:59:00 PM
I live in a high tax state, and although I am certainly not one of the Rich and Famous, I do get HAMMERED every year by the AMT. While I understand and conceptually agree with closing the loopholes and adding back to income certain tax preference items (i.e.- deductions of a preferential or beneficial nature), I fail to see why state income taxes should fall under the definition of a tax preference. The only thing worse than getting kicked in the groin once is to get kicked twice. Fixing this issue would be a huge help for those in the middle or upper middle class who are now in the AMT trap. Not that it would help those who live in the Bush states of Texas or Florida. Cheers to All.
Posted by: JB at 03/16/2010 02:39:20 PM
AMT is an outdated concept that the federal lawmakers are using to increase federal revenues at the expense of an ever increasing cross-section of the American workforce. Running up to the 2008 election, one of the candidates offered up a solution: 15% of your gross income, applied to ALL taxpayers, regardless of income, with no exceptions. This plan would basically eliminate the IRS, allow taxpayers to send in a tax return on a 3x5 card, and would be uniform to all. In addition, I don't remember the exact numbers, but the overall tax revenues would increase by a huge amount. What ever happened to equality to all?
Posted by: Phil at 03/16/2010 03:02:43 PM
Anyone ever note that the AMT is another version of the "flat tax" that has been bantered about? Heard that from none other than Jack Kemp. Flat Tax is already here - just needs to get cleaned up a bit.
Posted by: regina at 03/16/2010 05:04:59 PM
AMT will also hit taxpayers who have miscellaneous deductions. ex: employee business expenses, job hunting etc
Posted by: Federalist45 at 03/17/2010 10:36:00 AM
$250,000 gross - $30,000 federal income tax - $10,000 social security - $10,000 state income tax - $2,000 medicare - $8,000 real estate tax - $50,000 mortgage (a 4 BR, 2 BA, 2000 sq ft BASIC home in the D.C. area) - $30,000 HS tuition (necessary because of the pathetic state of the public schools into which I hemorrage tax dollars) - $10,000 various insurance, from life to auto to home but not medical) - $8,000 medical/dental - $8,000 college savings for two children = about $80,000 of useable income to cover all food, gas, cars, clothes, sports fees, music fees, charitable contributions, mandatory contributions to work-related events, utilities, communications. Yes, all of this still results in paying the AMT, having no IRA deduction, and having zero disposable income at the end of the day. This is an average home--barely making it paycheck to paycheck--and certainly in no way living extravagently. This represent the simple facts of life in this area--it is expensive just to live day-to-day, and what appears to be a large income of $250,000 (which, by the way, was created by scratching and clawing for every inch of it for over 30 years by two people) is actually a subsistence income in this extremely expensive area (sure, we could move a half mile over into a government-housing area and take our chances, but is that wise?). If you calculate all the sales tax, excise tax, fuel tax, utilities surcharges, and so forth, you will find that 50% or more of your income is taken from you by the government. It is absurd, particularly in light of the fact that the government gives back practically nothing and cries constantly for more. Then throw in capital gains and death taxes--and it reaches the absurd. Time to rethink it from ground zero--5% federal flat tax to cover defense and interstate commerce needs and that is about it. Restore the Constitution and, if We, the People, need government help, we will work on that at the local and State levels. In any case, the AMT is just one more government theft of hard-earned income. Put a stop to it. Write your Congressman and Senators today.
Posted by: davr at 03/18/2010 03:56:28 AM
Interesting article. I still haven't the slightest idea what the AMT is or does.
Posted by: gb at 03/21/2010 11:20:01 AM
just tax all the non-profits for all thier huge executive compensation packages and all unrelated profits that inevitably go back to a corrupt banker, lawyer, politician. and forigen government; that should eliminate the amt from taxing the masses.